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US tax overhaul could see $2.0 trillion repatriated: UN

Tue, Feb 06, 2018 - 6:51 AM

[GENEVA] The recent US tax overhaul could prompt US multinationals to repatriate around US$2.0 trillion (S$2.64 trillion euros), making a significant impact on global foreign direct investment, the UN said Monday.

The forecast from the United Nations Conference on Trade and Development (UNCTAD) came just over a month after US President Donald Trump signed into law a sweeping and controversial overhaul of the US tax code, offering dramatic tax cuts for corporations and temporary reductions for individuals.

In its annual report on trends in foreign direct investment (FDI) - a measure of cross-border private sector investments - UNCTAD warned that the US tax reform package would have "significant implications for global FDI patterns over the coming years." The tax overhaul "will affect the multinationals and their affiliates," James Zhan, who heads UNCTAD's investment and enterprise division, told reporters in Geneva.

He said the affected multinationals account for nearly half of the some US$26 trillion in current FDI stock, which measures the total level of global direct investments at a given point.

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"The reform (could) lead to the repatriation of almost US$2.0 trillion of returned earnings," Zhan said, referring to the amount of easily-repatriated FDI cash US multinationals are estimated to be holding abroad.

The new tax bill, which slashes the corporate tax rate to 21 per cent from 35 per cent previously, could entice some businesses to return with the promise of higher profits.

TAX REFORMS WORLDWIDE?

UNCTAD said the US move could lead to increased global tax competition.

"Over the longer term we may see that the US tax reform will trigger tax reforms worldwide," Mr Zhan said.

But according to UNCTAD's analysis, the most significant change in the US tax regime for multinationals is a shift away from a worldwide system, in which income earned around the globe was taxed, but was only payable when funds were repatriated to the United States.

Under the new territorial system, where Washington only taxes income earned in the United States and is offering multinationals to pay a one-off tax on accumulated foreign income, the companies have much less incentive to hoard their foreign-made income outside the country.

UNCTAD pointed out that the last time the United States offered a tax break on the repatriation of funds, in 2005, firms brought home two-thirds of their foreign-retained earnings.

"Funds available for repatriation are today seven times larger than in 2005," UNCTAD pointed out.

The UN agency cautioned that the impact of a possible major repatriation of funds remained unclear.

About one quarter of US FDI stock is in developing countries, but most of that has been invested in productive assets, and is therefore not easily available in cash form, UNCTAD said.

Offshore financial centres in places like the Netherlands, Britain, Luxembourg and Bermuda, where US FDI stock is stored in cash, would likely see the biggest drain, it added.

While repatriating that cash would likely have little impact on projects in the short term, "longer term it would reduce FDI outward stock, which means the investible funds for the future ... is reduced," Mr Zhan warned.

It also remains uncertain how the repatriated funds would be used in the United States.

The 2005 tax break has been criticised for creating a windfall for multinationals and their shareholders without leading to significant increases in capital spending or jobs, UNCTAD said.